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The insiders blinked

Commentary: Insiders last week cut back on their selling

CHAPEL HILL, N.C. (MarketWatch) — Just when it looked like the stock market would crumble under the weight of insider selling, the insiders retreated.

Since they have done this so many other times as well over the last two years, it’s beginning to seem as though they are toying with us.

Consider insiders’ response last week to the unfolding crisis in Japan. According to researchers who have closely analyzed insider behavior in the past, It would have been a particularly ominous sign if they had continued to sell their companies’ shares at the same fast clip that they had set in previous weeks. That would have meant that they had little confidence that the prices of their shares would recover any time soon.

Fortunately, that’s not what they did.

This is well illustrated by the ratio of the number of shares that insiders sold last week to the number that they bought — a metric that is calculated weekly by the Vickers Weekly Insider Report, published by Argus Research.

According to the latest issue of this report, published Monday, this sell-to-buy ratio was only half as high last week as it was the week before. In fact, according to Vickers, the ratio now stands at its best level since September.

In the words of Jonathan Moreland, editor of an investment-advisory service entitled Insider Insights: “Insiders stepped into the turmoil over the past week, and bought the dip.”

Early last September, the last time that the insider sell-to-buy ratio was as low as it was last week, the Dow Jones Industrial Average
DJIA, -0.05%
was trading below 10,500 — nearly 2,000 points lower than where it stands today. This time around, of course, the bulls would be happy with just a fraction of that big a gain.

In any case, the advisory services monitored by the Hulbert Financial Digest that base their strategies on the behavior of insiders have chosen this week to increase their recommended market exposures.

What stocks are they recommending for purchase?

Vickers is buying USA Mobility
USMO
, the wireless communications provider. Moreland is recommending three new purchase candidates, two of which are drug companies: Ligand Pharmaceuticals
LGND, -0.74%
and Threshold Pharmaceuticals
THLD
.

Moreland’s third pick is Uranium Resources
URRE
He says that this is a “white-knuckle” recommendation, given how much the stock plunged in response to the nuclear crisis in Japan.

But, at least to some extent, following the lead of insiders inherently leads to white knuckles, since the strategy, like all contrarian approaches, often involves buying out-of-favor stocks.

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